Obama Proposal May Force JPMorgan, Goldman to Sell Buyout Units

Obama Proposal May Force JPMorgan, Goldman to Sell Buyout Units


Jan. 22 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc. may have to sell some private-equity businesses and stop investing in buyouts under a proposal by President Barack Obama to limit bets made by banks with their own capital.

Obama asked Congress yesterday to prohibit banks from owning or making investments in private-equity and hedge funds that “are unrelated to serving customers.” While financial institutions could still manage the assets on behalf of clients, they wouldn’t be able to invest in their own funds or those run by firms such as Blackstone Group LP and KKR & Co.

The proposed rules may alter Wall Street’s role in private equity, where banks and investors commit money to buy companies, real estate and other assets. Banks also invest with buyout firms to help deepen their lending relationships.

“In a world where there is less capital available for private equity and hedge funds, this will take out another source of funding,” said Bruce Ettelson, head of the fund- formation group at law firm Kirkland & Ellis LLP in Chicago.

JPMorgan may seek to divest its OneEquity Partners private- equity unit, according to a person familiar with the New York- based bank. OneEquity Partners manages $8 billion in direct investments, with holdings that include TV Guide.

The rules may affect Goldman Sachs’s principal investment group, which includes the New York-based company’s stake in Industrial & Commercial Bank of China Ltd. and real estate. The group reported revenue of $1.17 billion last year.

In addition, Goldman Sachs’s global special situations group makes principal investments within the firm’s fixed-income, currency and commodities business.

Representatives of the banks declined to comment.

No Rush

The government won’t seek to expedite divestitures at banks, House Financial Services Committee Chairman Barney Frank said yesterday.

“It would be a mistake to mandate divestiture of all the hedge funds and private-equity entities that might be covered within a short period of time,” Frank said in an interview. “That would create fire-sale conditions.”

Bank executives said that based on the administration’s comments, they didn’t expect that ownership of hedge funds, such as JPMorgan’s Highbridge Capital Management LLC and Morgan Stanley’s FrontPoint Partners LLC, would fall under the new regulations because these firms manage client assets.

Asset Management OK

Austan Goolsbee, a member of Obama’s Council of Economic Advisers, said in a CNBC interview yesterday that the proposal was “not intended to get rid of asset management as a function.”

JPMorgan’s investment in Highbridge, which has about $23 billion in assets under management, is less than $1 billion.

Obama is seeking to limit the size and trading activities of financial institutions as a way to reduce risk-taking and prevent another financial crisis. In addition to curtailing private-equity and hedge-fund investments, the plan bars banks from running proprietary trading operations solely for their own profit.

Brian Moynihan, chief executive officer of Charlotte, North Carolina-based Bank of America Corp. said last week that isolating proprietary trading could prove challenging for regulators.

“You can try to define it, but I think when you offset a position you are doing it for the firm, you could say that’s proprietary but that’s actually managing a risk,” Moynihan said in testimony before the Financial Crisis Inquiry Commission last week in Washington.

Targeting private-equity investments by banks doesn’t go to the root of the problems that caused the financial meltdown, said Steven Kaplan, a professor at the University of Chicago Booth School of Business.

“Private-equity investments did not cause the crisis,” Kaplan said. “It was their loans that went bad.”

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